Newbie risk reward ratio question

[zoreli]

Hi

I have problem to establish right risk reward ratio and I need some help here.

Here is my problem: I am trying to follow the trend on base on candlestick chart, and I would like to exit after 10 pips. However, if I place 10 pips stop loss, I am loosing more than I am winning.

From the other side, if I keep the position open, there is a chance that market can turn against me, and I will have even more loosing trades. Is 10 pips too little?

For the moment - I am still on demo, but I have to find solution and to build strategy for this in case to become profitable.

Regards, Zoreli

[4xStar]

Stop losses depend on the pair and the timeframe you are trading, in general they should be 1:2 or 1:3 risk to reward, that is risk 10 pips to make 20 or one pip to make 2 or 3.

Trading the GBP/JPY on a one hour or above tf you would have to give it at least 50-60 pips of room so your profit target should be at least 100-150 pips. With the Euro on the same tf you might only need to give it 15-20 pips stoploss so profit target should be 30-60 pips.

It is also subjective and depends on your account size, skill level and risk tolerance. There is no single answer, but in general try to determine if the pair you are following on the timeframe you are following could easily move X pips in your favor, then set a stop loss 1/2 to 1/3 of X and check again to see if that looks reasonable according to the chart setup.

Practice with very small positions until you start getting a feel for it...

[Josef Benjamin]

Originally Posted by 4xStar

Stop losses depend on the pair and the timeframe you are trading, in general they should be 1:2 or 1:3 risk to reward, that is risk 10 pips to make 20 or one pip to make 2 or 3.

Trading the GBP/JPY on a one hour or above tf you would have to give it at least 50-60 pips of room so your profit target should be at least 100-150 pips. With the Euro on the same tf you might only need to give it 15-20 pips stoploss so profit target should be 30-60 pips.

It is also subjective and depends on your account size, skill level and risk tolerance. There is no single answer, but in general try to determine if the pair you are following on the timeframe you are following could easily move X pips in your favor, then set a stop loss 1/2 to 1/3 of X and check again to see if that looks reasonable according to the chart setup.

Practice with very small positions until you start getting a feel for it...

great advice 4xstar, If i may add quickly, 10 pip stop losses is not sustainable on ANY currency pair as far as im concerned...UNLESS you know what your doing and are scalping...even then, you should never risk more than you stand to make on any given trade.

[mytwopips]

10 pip sl's are pretty tight. They will get hit a lot. Even when you are right.
Demo, Demo, Demo. You will find the answer to any strategy and it will only cost you time.

[zoreli]

Thanks to all of you for the advices.

Since I will have small account (about $5000.00) my idea was to get small profits (10 pips) and to go out. However, due the losses that would not be possible.


I will try to play like this:

SL:35 pips, Take Profit on 70 pips.


I will not take my profit on 10 pips anymore and we will see. That's why virtual money are for. Waiting to hear more advices from you guys.

Regards, Zoreli

[4xStar]

Originally Posted by zoreli

Thanks to all of you for the advices.

Since I will have small account (about $5000.00) my idea was to get small profits (10 pips) and to go out. However, due the losses that would not be possible.


I will try to play like this:

SL:35 pips, Take Profit on 70 pips.


I will not take my profit on 10 pips anymore and we will see. That's why virtual money are for. Waiting to hear more advices from you guys.

Regards, Zoreli

$5000 is not such a small account .. many people start with far less!
Basically you do not want to risk more than 3% of account size on any one trade .. some say no more than 1%. With $5k, 1% is $50 or about 50 pips, so that is a generous stop loss.
If you are doing multiple mini-lots (and as a newbie with $5k you should only be doing mini lots) then you could risk 25 pips per position & hold 2 positions.
3% at risk would allow you to hold 3 positions with a 50 pip sl per position.
And so on.

Taking profit is not that rigid .. sometimes you will take profit at 10 or 15 or even 5 pips when you planned on 50 .. it depends on price action once you are in the trade. Better to take 10 pips of profit than to ride trades to your max stop loss each time!

Your stop losses should be rigid, because you must not risk too much of your account on any one trade (and believe me, I still need to work on that part!! It is not always easy...) and most importantly, you need to know BEFORE entering a trade:

Why am I entering this trade? (there should be 3 good reasons)
What is my profit potential?
What is my stop loss?
What would make me close the trade (you only need ONE good reason to get out)

3 good reasons to enter .. only one to exit.

I'm still working on practicing what I preach! Although I know WHY I am entering a trade, what my pt & sl are, and even what would make me leave the trade .. I am still guilty of finding 'excuses' to stay in the trade once I am in. Like .. "I will get out if price retraces below the last candle" Then when it does, I move to a higher timeframe chart and say .. 'well, on this timeframe it actually could move down a bit more & still be valid'. In other words I turn a short term trade into a longer term one, or find other justifications to stay in .. and end up losing pips when I could have just cashed in 5 or 10 pips, instead of the 50 I hoped for (because price began to be sluggish).

You also need to consider the time factor when going into a trade .. if you are trading off the 15 min chart, you want price to move in your favor a lot sooner than if you are trading a 4 hour chart.

And one of the keys to forex success imho is trading multiple lots. If you think a trade is a valid one, put on 2 or even 3 positions, not just one. Then you can take profits quickly from your first position, move your stop to break-even (your entry price) on the remaining one or two positions . .. and now you are trading with free money

A few years ago a trader called bunnygirl invented the BGX or bunnygirl cross, which was basically a moving average cross on the 30 min chart. The system was good & reportedly she became a millionaire & retired from trading .. but .. what made that happen was not so much the BGX system but the fact that she always opened 4 positions. #1 she took profit at 10 pips, moved stops on the other 3 up 10 pips. #2 she took profits at 20 pips and moved stops on remaining 2 to breakeven.
#3 tp was usually 30 pips .. and #4 she let ride as long as possible to catch the major runs, trailing a stop 50 pips behind.
Powerful.

Hope that helps

[rhodytrader]

Originally Posted by zoreli

I will try to play like this:

SL:35 pips, Take Profit on 70 pips.

I am very much opposed to the concept of fixed stop sizes for the very simple reason that the markets change - their volatility changes. A fixed stop doesn't allow for adjustments based on those changes.

The same is true with fixed targets.

[rhodytrader]

Originally Posted by 4xStar

Basically you do not want to risk more than 3% of account size on any one trade .. some say no more than 1%. With $5k, 1% is $50 or about 50 pips, so that is a generous stop loss.

Maybe. Maybe not. Depends on your timeframe and the pair you trade. (By the way, a pip is only a fixed value for a handful of pairs).

If you are doing multiple mini-lots (and as a newbie with $5k you should only be doing mini lots) then you could risk 25 pips per position & hold 2 positions.

DO NOT think this way. This will lead to putting your stops too close. Figure out what your need to risk in pips for the trade, then figure out the contracts. Do not do it the other way around.

3 good reasons to enter .. only one to exit.

This seems backwards to me. I only have 1 reason to enter a trade - the set up matches my criteria. That's it. Quite a few things can get me out of a trade, though.

And one of the keys to forex success imho is trading multiple lots. If you think a trade is a valid one, put on 2 or even 3 positions, not just one. Then you can take profits quickly from your first position, move your stop to break-even (your entry price) on the remaining one or two positions . .. and now you are trading with free money

Why would you take any trade that isn't a valid one?

Only put on multiple contracts if it fits your risk strategy. And test out whether it makes sense to take partial profits along the way. For some strategies it will work well. For some it would actually decrease performance.

For that matter, test out whether you're best off putting on a full position or a partial one and adding to it.

[Andrewunknown]

Originally Posted by rhodytrader

This seems backwards to me. I only have 1 reason to enter a trade - the set up matches my criteria. That's it. Quite a few things can get me out of a trade, though.

These (the three items mentioned by 4xstar) aren't "reasons to enter" as such - they're pre-determined parameters by which the trade will be managed: descriptive of the trade taken (or ought to be), not prescriptive of it. But, 4xstar makes a valid point: they are, in general, important questions to ask and answer before committing to a position.

[4xStar]

Originally Posted by rhodytrader

DO NOT think this way. This will lead to putting your stops too close. Figure out what your need to risk in pips for the trade, then figure out the contracts. Do not do it the other way around.



This seems backwards to me. I only have 1 reason to enter a trade - the set up matches my criteria. That's it. Quite a few things can get me out of a trade, though.



Why would you take any trade that isn't a valid one?

Rhody, I'm talking to an absolute beginner .. you have to think back to when everything was new. The example of setting a stop at 25 pips was just an example of HOW to think of max pips stoploss as it relates to overall account size. It is not a recommendation to set X amount of pips on any trade.

And your 1 reason to enter a trade is actually a whole series of reasons because your setup consists (I would assume) of more elements than just the shape of one candle, or the direction of one ma.

Of course you wouldn't take a trade that is not valid .. but that is how an experienced person thinks. For a brand new trader they have to learn how to decide if a trade IS really valid. When people are just getting started, they are often timid & uncertain of their decisions, so they just do one position, like putting one toe in the water.
I am trying to say to first have confidence in your decision BECAUSE of all the reasons (= your setup) that are causing you to take the trade .. then you can put on 2 positions or more and let some ride to potentially greater profits.

For someone who is brand new, I am just trying to keep it really really simple.